Hong Kong, July 27, 2017 -- Moody's Investors Service has revised its outlook for China's
banking system to stable from negative.
"The revision reflects our expectations that nonperforming loan
formation rates will be relatively stable at current levels,"
says Yulia Wan, a Moody's Assistant Vice President and Analyst.
Moody's points out that by comparison, the banks' asset
quality had deteriorated more rapidly during 2015 and also in the first
half of 2016.
"The stable outlook is also based on our assessment that the government's
adoption of more coordinated policy measures to curb shadow banking will
help mitigate asset risks for banks, and address some key imbalances
in the financial system," adds Wan.
Moody's analysis is contained in its just-released report
titled "Banking System Outlook Update — China: Improved operating
environment and prudential regulations drive change to stable outlook,"
and is authored by Wan.
The stable outlook is based on Moody's assessment of five drivers:
Operating Environment (stable); Asset Quality and Capital (stable/stable);
Funding and Liquidity (deteriorating); Profitability and Efficiency
(deteriorating); and Systemic Support (stable).
On the operating environment, Moody's says that conditions
are stabilizing, helped by government policies to support growth
and reduce systemic financial risks.
In particular, growth will come from policies to encourage investment
in specific sectors such as infrastructure and the construction of self-occupied
residential properties. And, the banks will benefit from
the Chinese regulators' stronger efforts to address two long-running
financial risks: the accumulation of financial leverage among corporates,
and the strong growth in shadow banking.
Moody's report also says that asset risks will moderate over the
next 12-18 months, while capitalization will stay stable.
Specifically, overall delinquency rates will stabilize as corporate
profit continues to recover, helped by stable and solid economic
growth, steady commodity prices and a slower increase in corporate
leverage.
As for funding and liquidity, small and medium-sized banks
that have increased their reliance on short-term, confidence-sensitive
funds to support illiquid assets in recent years will continue to face
tight liquidity conditions.
On profitability and efficiency, Moody's report says that
the banks' profit growth will be constrained by continued pressure
on net interest margins (NIMs) and slower growth in fee income.
In particular, pressure on NIMs will continue, as funding
costs increase in a tighter liquidity environment. Growth in net
fees and commissions income will also slow because stricter regulations
on shadow banking will reduce growth in income from fees for wealth management,
consultancy and custodian services.
Moody's expects the Chinese government will remain a key shareholder
of major banks and continue to be committed to providing strong support
for the banks in times of stress. Moody's view takes into
account the banks' size and systemic importance, and the government's
policy priority of maintaining systemic stability and public confidence
in the banking system.
However, government support for smaller banks will likely become
more selective, following the introduction of deposit insurance
scheme in May 2015.
The change in Moody's outlook for Chinese banks follows Moody's
individual rating actions on medium-sized Chinese banks in October
2016 and big five banks in May 2017. As part of the rating actions,
Moody's changed most of the banks' ratings outlooks to stable from
negative. Banks with stable outlooks now account for a combined
89% of total assets held by Moody's-rated banks in
China.
Moody's rates 24 banks in China that together accounted for 65%
of total system assets at 31 December 2016.
Subscribers can access the report at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1082220
The report may also be found through Moody's topic page "China's Trilemma:
Growth, Reform and Stability", available at http://www.moodys.com/chinarebalancing.
This page provides a centralized source for Moody's research related to
key credit issues in China as the country's macroeconomic story continues
to unfold.
Recent Moody's publications relating to China's Trilemma include:
• Securities Companies — China: Rising credit pressure
from stock pledged lending business
• Auto ABS — China: Surge in used vehicle sales is credit
positive for Chinese auto ABS
• Banks — China: Measures to curb shadow banking benefit
banks but also bring adjustment risks
• P&C Insurance — China : Proposed compulsory pollution
liability cover to fuel non-motor premium growth
• Local government financing vehicles (LGFVs) — China:
Policies limiting support are credit negative for LGFVs; contingent
liabilities to persist
• China Property Focus: Lower-tier city sales growth
outpaced higher-tier cities but sustainability uncertain
• Regional and Local Governments — China: Debt and Finances
Snapshot
• Life Insurance — China : Growth and Regulatory Challenges
Underpin Negative Outlook
• China's Proposed Regulations for Credit and Guarantee Insurance
Are Credit Positive for Insurers
• Asset Management — China: MSCI Inclusion Of China's
A shares Is Positive for Chinese Equity Markets
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Sonny Hsu, CFA
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
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Minyan Liu
Associate Managing Director
Financial Institutions Group
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Moody's Investors Service Hong Kong Ltd.
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